Business prospects: The company derives about 78 per cent of its revenues from polyester vinyl yarn and about 21 per cent from fabrics. SIL currently produces 18s count of yarn mainly used in making suiting. The company's brands are fairly well-known in Western India and this is backed by a good sales network.

For the year ended 2002-03, the company's topline grew 4 per cent to Rs 225.5 crore and profits rose to Rs 7.6 crore from Rs 4.6 crore of the previous year. The rights offer price is at four times the company's 2002-03 earnings.

Going forward, the increase in cotton price would, in turn, increase cotton yarn prices. This may drive the demand for polyester vinyl yarn (PV yarn), which is used as a substitute for cotton yarn.

However, the firm price in the main raw material, PSF, the price sensitivity of the end users of PV yarn and the presence of intense competition from both the organised and the unorganised sector would impact the company's margins.

The demand for the 30s count yarn depends mainly on offtake from exporters. China, which produces yarn at lower cost, is a major player in this market. In addition, indirect entry barriers to fabric exports are fairly high. The initiatives by many countries to curb fabric exports through restrictions on the use of chemicals in textile products and preferential duty structures, impart a high degree of uncertainty.

Investment risk: SIL has about 24 associate companies engaged in trading and investment activities, with interests in shipping, construction, plastics manufacturing and real estate. The declining profitability of a number of these associate companies could have an adverse impact on the Sangam (India)'s profitability. This enhances the investment risk associated with this stock. Nevertheless, if Sangam (India) manages to ramp up its earnings sharply from the current levels, investing at the rights offer price may pay off.

But, given the uncertainties surrounding this, only investors with an appetite for high risk may consider subscribing to the offer. Even these investors may be better off selling their existing holdings in the stock to take advantage of the recent rise in its stock price. The stock trades at about Rs 33.

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